Pearls of wisdom for a jumpy market
Just because you've heard it a hundred times doesn't mean it ain't true. CNN's Allan Chernoff dusts off some old maxims for today's troubled investors.
NEW YORK (CNN) -- What to do now after Tuesday's roller coaster ride? Buy? Sell? Hold? There's no universal rule. There can't be one that applies equally to the recent college grad who has put a chunk of his first paycheck into shares of a dot-com and the retiree living off utility dividend payments. But, we can all learn from some of Wall Street's great aphorisms.
'Don't try to catch a falling knife'
Trying to buy a plunging stock can poke a painful hole in your portfolio. What appears to be an attractive price one minute, may be expensive 60 seconds later during a market collapse. That's why professional traders carry this analogy further to warn each other, "Don't be a hero", and "Don't step in front of a runaway train."
When enough traders apply such maxims during market downturns, prices can drop precipitously as buy orders dry up. When the big money pulls buy-orders, sellers have to be willing to take a hit in order to find a price that will get them out of their positions. So, it's often best to wait for a bit of stability before stepping in to buy.
'It's OK to panic, if you panic early'
It's no longer "early." Even before Tuesday's opening bell the Dow had already lost 15 percent. That's three-quarters of the way into bear market territory. Sure, you may wish you had panicked in late autumn when we began seeing signs of distress-brokerage losses from mortgage-backed securities, investor reluctance to buy corporate bonds, a rise in mortgage delinquencies, a tightening of consumer caution and soaring oil prices.
But odds are that wasn't enough to make you bail out of the market. Now, it's late for panicking. Sure the market could keep tumbling. But no one really knows how low it may go - and how quickly it could bounce back.
'The trend is your friend'
This is most often heard in the commodity futures pits where momentum trading is especially prevalent, but it applies to the stock market as well. When the broad-based indices are rising, the majority of stocks climb. The opposite is true as well. Most stocks tend to trade with the market.
So, if the market's trend is down, it's likely your stocks - or stocks you're looking to buy - will follow as well. Again, it's another reason to be cautious in approaching a market that's taking a beating.
The most aggressive and emotional investors will ignore these pearls of wisdom. Sure, they may win a gamble on the roller coaster's direction. But, they can easily get stung as well. Ever wonder why your second cousin gave up day-trading to take a "real job"?